Energy Update | July 7th, 2020
Hot Summer Weather Triggering Natural Gas Rally From 30-Year Low! https://youtu.be/nDsa_Sxk6PE In my June 16th Energy Update, I said Natural
Hot Summer Weather Triggering Natural Gas Rally From 30-Year Low! https://youtu.be/nDsa_Sxk6PE In my June 16th Energy Update, I said Natural
In my June 16th Energy Update, I said Natural Gas prices remained low, but higher prices were on the horizon. Natural Gas prices were consolidating at the lowest inflation-adjusted prices since it began trading in 1990. Prices this low were below the cost of production, and companies producing Natural Gas cannot generate profits; therefore, weaker companies will not survive, and surviving companies will be highly motivated to decrease production leading to higher prices.
The evidence Oil and Gas companies intend to decrease production is reflected by the July 2nd Baker Hughes report showing over the last year Oil rigs have declined 77% from 789 to 185 active rigs, Natural Gas rigs declined 56% from 174 to 76 active rigs.
In my last report, I said the mitigating factor keeping Natural Gas prices low was decreased demand caused by shutdowns. But as our country reopens demand would increase and with production expected to decrease prices would likely be driven higher, and I said we know demand increases during the Summer cooling season, which will also contribute to the likelihood prices will be higher in the second half of this year.
Over the last week hot weather throughout the United States as expected increased demand to cool homes and businesses and Natural Gas has rallied sharply off its 30-year low reached last week:
The $1.43 per MMBtu low reached Friday June 26th just happened to be expiration day of the nearby contract of Natural Gas. I do not believe this was a coincidence and I have seen this happen in other commodities. The most recent example is what took place to Crude Oil on April 20th. The nearby contract of Crude Oil plunged to negative $40 per 1,000 barrels when traders were forced to close out long positions prior to contract expiration and avoid taking physical delivery of Crude Oil.
This was purely a short-term trading phenomenon in which traders who previously sold Crude Oil were in control of the market and could force the price down to an unsustainably low price below zero thereby maximizing their profits on short positions. But as you can see in the chart below the next day Crude Oil immediately went back into positive territory, and steadily traded higher:
I believe Natural Gas experienced a similar short-term trading phenomenon June 26th when on expiration day the nearby contract plunged to $1.43 per MMBtu, but as you saw in the 1st chart, the next day Natural Gas moved higher and in 7 trading days we are now up 33% near $1.90 per MMBtu.
Although in the short-term Natural Gas could retest recent lows, it is highly unlikely prices will make new lows and the upside risk of higher prices is extremely high! Remember we have a record low number of 76 active Natural Gas rigs, below where they were in 2016 when active rigs declined to a low of 81 active rigs and Natural Gas rallied from $1.61 to near $4.00 by the end of the year.
And as you can see in the above chart, in 2016, after reaching $1.61 per MMBtu prices remained higher for 3-years. In 2020, with active rigs reaching a record low of 76 active rigs, where do you believe prices will likely be the next 3-years?
Based on the empirical evidence delineated in this report, I trust you appreciate why I believe, Natural Gas and Electricity prices are poised to increase long-term, and it is wise to secure energy agreements near present price levels. The short-term downside reward potential of lower prices is minimal versus the upside risk of higher prices long-term.
Not every client’s risk tolerance and hedging strategy is the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Senior Commodity Analyst
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